Obvious accounting error sets aside LMAA final award

In a recent charterparty dispute between Lavender Shipmanagement Inc. and Ducat Maritime Ltd., Ducat successfully challenged part of a London Maritime Arbitrators Association (LMAA) Small Claims Procedure (SCP) award in court, when the arbitrator was found to have breached his duty of fairness.

This successful challenge is noticeable for a number of reasons, most significantly due to the fact that SCP excludes the right to appeal against arbitral awards. In this article, senior associate Stella Petritsi explains what this judgment will mean for future arbitrations where obvious errors have been found.

The facts of the case

The owners of the vessel “Majesty”, Lavender Shipmanagement Inc., claimed in a reference under the LMAA SCP, unpaid hire in the amount of US$37,831.83 against the vessel’s charterers, Ducat Maritime Ltd. Ducat agreed with the owners’ claim calculations, save for (a) a minor off-hire period, (b) a claim by the owners for damages for inadequate hull cleaning, and (c) amounts claimed by the owners in lieu of hull cleaning and dunnage removal. Ducat separately sought to deduct US$15,070, by way of set-off and counterclaim, for alleged underperformance.

The arbitrator found that all of the disputed items on the owners’ hire calculations were due and payable to the owners, except for the claim for damages for inadequate hull cleaning at US$9,553.92. The arbitrator also dismissed Ducat’s underperformance counterclaim and decided that Ducat had no entitlement to make any deductions from hire on that basis.

Based on his findings, the arbitrator should therefore have awarded the owners a total of US$28,277.91 in respect of their principal claim, namely US$37,831.83 less US$9,553.92 for hull cleaning.

Instead, the arbitrator added Ducat’s unsuccessful counterclaim of US$15,070 for underperformance to the owners’ claim, and found that the owners’ total claim was actually worth more than the owners had, in fact, claimed.

Ducat applied to the arbitrator twice for a correction of the award under Section 57(3) of the Arbitration Act 1996, on the basis that there had been a clerical mistake or error arising from an accidental slip or omission. The arbitrator declined both applications stating that there had been no error in the calculations. In the circumstances, Ducat challenged the award in court under Section 68 of the Arbitration Act 1996.

Charterers’ challenge under Section 68

To succeed in their appeal under Section 68, Ducat needed to show there was a serious irregularity among those listed in Section 68, affecting the tribunal, the proceedings, or the award, and that that irregularity had caused Ducat substantial injustice.

Ducat contended that:

1. The arbitrator had failed to comply with Section 33 of the Arbitration Act 1996, in having reached a conclusion that was contrary to the common position of the parties, without providing an opportunity for the parties to address him on the issue.
2. The arbitrator had made an obvious accounting mistake which he refused to correct, which made his award unfair and challengeable under Section 68(2)(a).
3. The arbitrator’s mistake inflated the owners’ claim by almost 50%, and meant that Ducat was ordered to pay US$9,553.92 more than they should have been, or over 25% of the total award. Had Ducat been given an opportunity of commenting on the matter, the arbitrator might well have reached a different view, and a significantly different outcome might have been produced.

The judgment

The court agreed with Ducat that there was an irregularity which fell within Section 68(2) and this caused Ducat substantial injustice. Accordingly, the court set aside part of the award and corrected the accounting error.

Irregularity within Section 68(2): breach of the Section 33 duty

The court held that the arbitrator had failed to comply with his Section 33 duty, in having failed to adhere to the common ground between the parties when deciding how much was owed, on a basis which had not been argued by either party, without giving the parties the opportunity to comment on it.

Irregularity within Section 68(2): serious accounting mistake

The court considered that a gross and obvious accounting mistake made in the award may well represent a failure to conduct the proceedings fairly, not because it represents an extreme illogicality, but because it constitutes a departure from the cases put by both sides, without the parties having had an opportunity of addressing it.

Substantial injustice

The court regarded it as substantially unjust that a party should, by reason of an error such as that made by the arbitrator, be ordered to pay about 33% more than was due by way of principal, and be ordered to pay interest on its own unsuccessful counterclaim. Although, as the owners argued, the parties may have agreed to accept the possibility of some injustices in a procedure such as the LMAA SCP, the Judge considered the arbitrator’s mistake as going well beyond what could reasonably be expected as an ordinary incident of arbitration, even SCP arbitration.

What this means for future mistakes in arbitration awards

It is remarkable how Ducat have obtained the court’s permission to challenge, under Section 68, an award made under the LMAA SCP, where appeal is expressly excluded.

It is also interesting to note that Ducat passed the high threshold required for succeeding in an appeal under Section 68. As the Judge commented, Section 68 was “really designed as a long stop, only available in extreme cases, where the tribunal has gone so wrong in its conduct of the arbitration that justice calls out for it to be corrected”.

By this judgment, the court clarified what a party may do, in the context of the Arbitration Act 1996, if faced with a glaringly obvious error in the award which the tribunal refuses to acknowledge and correct. This had been unclear, as relevant case law had previously been decided based on an older version of the Arbitration Act. An award can be successfully challenged, based on the tribunal’s failure to adhere to agreed common ground between the parties.

For arbitrators, two lessons emerge. First, it is imperative that any substantial position of the tribunal which has not been put forward by the parties, is put to the parties for comment, before being decided in an award. A tribunal may very well have their own views, and this is especially the case in maritime arbitration where the parties expect a certain level of expertise by the tribunal, but such views must always be put to the parties.

Second, there is no excuse for not taking the requests of a party under Section 57 of the Arbitration Act 1996 for a correction to an award, with the utmost seriousness. That is a mechanism designed to correct mathematical and similar errors and can avoid costly appeals to the court.

For parties and their solicitors, the lesson is also striking. Had solicitors for the successful party in the arbitration accepted the obvious error, court proceedings would have been avoided.